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35 Cards in this Set
- Front
- Back
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Dividend Model (3 Stage Model) |
Step 1.) Find out dividends for all periods D1 = D0(1+g) = $0.80(1.25) = $1.00 D2 = D1(1+g) = $1.00(1.25) = $1.25 D3 = D2(1+g) = $1.25(1.15) = $1.4375 D4 = D3(1+g) = $1.4375(1.15) = $1.6531 Step 2) Run Capm for RR = 12.4 Step 3) CF Analysis and use Price of stock using DDM as ending value to add on to last cash flow The easiest way to proceed is to use the NPV function in the financial calculator.CF0 = 0; CF1 = 1.00; CF2 = 1.25; CF3 = 1.4375; CF4 = 1.6531 + 40.57 = 42.22I = 12.4; NPV = 29.34The value of the firm today is $29.34 per share. |
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Growth = G |
G= Retention Rate X Profit Margin X SBV ( Sales/Book Value) |
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Price-to-Sales |
Po/S1= (profit margin x payout ratio)/(r-g) |
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FCFE |
FCFE = Net Income + Interest(1-t) - Cap Ex - Working Cap +Borrowing +Tax + impairments- Premium - Gain +Losses + Amortization +Depreciation |
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FCFF |
FCFF = Net Income+ Interest(1-t) - WorkingCap -CapEx + Deferred Tax Liabilities + Impairments - Premium - Gain + Losses +Amortization +Depreciation FCFF = NI(netincome) + NCC(noncash charges) + Int (1 - tax rate) (aftertax interest) - FCInv (fixed capital) - WCInv (working capital) |
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four variables for Gordon Growth Model |
stock price, rr, dividend growth rate, dividend |
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p/e Ratio = |
payout ratio / (r-g) |
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ROE |
g/retention ratio |
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Method of forecasted fundamentals. |
The method of forecasted fundamentals is based on the rationale that stock values differ due to differences in the expected values of fundamentals such as sales, earnings, or related growth rates.. The method of forecasted fundamentals relates multiples to company fundamentals using a DCF method. It does not explicitly rely on the Law of One Price. Further, it does not typically focus on benchmarks. |
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Forecasted Depreciation Rates Forecasted Capital Expenditures |
Forecasted depreciation rates are usually based on historic information whereas forecasted capital expenditure is usually based on forecasted data.
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Enterprise Value |
EV = (market value of common stock + market value of debt - cash and investments)
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EBITDA |
EBITDA = (net income + interest + taxes + depreciation / amortization)
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Residual income models
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Residual income models work for companies with no dividends and volatile or negative cash flows. They do not work, however, when the clean surplus relation does not hold, as is the case when companies take charges against equity.
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Clean surplus accounting
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The clean surplus accounting method provides elements of a forecasting model that yields price as a function of earnings, expected returns, and change in book value. Clean surplus accounting is calculated by not including transactions with shareholders (such as dividends, share repurchases or share offerings) when calculating returns.
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Transaction-related valuations
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Transaction-related valuations may be performed for reasons related to venture capital financing, an IPO, a sale of the firm, bankruptcy, or performance-based managerial compensation.
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Compliance-related valuations
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Compliance-related valuations are performed for financial reporting and tax purposes.
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Litigation-related valuations
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Litigation-related valuations may be required for shareholder suits, damage claims, lost profits, or divorces.
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justified price-to-book value
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(ROE - g) / (r - g)
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A control perspective is most consistent with which of the following valuation approaches?
A)Free cash flow (FCF). B)Price to enterprise value. C)Dividends. |
Dividend policy can be changed by the buyer of a firm. Thus, the FCF perspective looks to the source of dividends in a position of control rather than directly at dividends. The price to enterprise value approach does not focus on cash flows.
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H Model for consistent decline in growth |
V0 = {[D0(1 + gL)] + [D0 × H × (gS − gL)]} / (r − gL) |
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What growth rate is implied by the current P/B rate
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g = r − [B0(ROE − r)] / (V0 − B0)
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P/S multiple =
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P/S multiple = [Profit Margin × Payout Ratio × (1 + g)] / (r − g)
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build up method |
Using the build-up method: the risk-free rate, the equity risk premium, the small stock premium, a company-specific risk premium, and an industry risk premium are added together
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current intrinsic value using multi stage residual income model
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V0 = B0 + PV of interim high-growth RI + PV of continuing RI
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FCFE Calculation |
FCFE year 0 = Earnings per share − [(Capital Expenditures − Depreciation) × (1 − Debt Ratio)] − [(Change in working capital) × (1 − Debt Ratio)]
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Growth |
G= Retention/ ROE |
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residual income model |
V0 = B0 + [(ROE - r) / (r - g)]B0 |
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top-down valuation process
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The valuation process consists of 5 steps:Understanding the business.Forecasting company performance.Selecting a valuation model.Complete the valuation.Decision making.
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PEG |
The PEG ratio is: PEG = (P/E) / earnings growth. As such, firms with negative expected earnings growth will have a negative PEG ratio, which is meaningless. |
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The excess earnings method
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The excess earnings method values tangible and intangible assets separately; this method is useful for small firms and when there are intangible assets to value. In the free cash flow method, a firm is valued by discounting a series of discrete cash flows plus a terminal value. In the capitalized cash flow method, a firm is valued by discounting a single cash flow by the capitalization rate.
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Sustainable growth rate
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Sustainable growth rate = ROE × retention rate
g=[1-(Do/$Earnings)] x ROE |
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ROE (Dupont) |
ROE= profit margin X asset turnover X financial leverage |
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EVA =
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NOPAT − (WACC% × TC)
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Equity charge |
Equity charge = equity capital × cost of equity capital |
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Residual income =
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Residual income = net income − equity charge
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